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principles of finance

Questions and Answers of Principles Of Finance

a. Find the average return and standard deviation of a portfolio composed of 50% of stock ABC, 20% of stock QPD, and 30% of stock XYZ.
c. John has decided to invest in a portfolio composed of 100% XYZ stock. Mary, on the other hand, is investing in a portfolio composed of 50% ABC and 50% XYZ. Whose portfolio is better? Why?
b. What is the correlation of the returns? (Nothing to compute here, just think!)
a. Compute the mean, variance, and standard deviation of the returns on ABC and XYZ.
17. (Stock vs. portfolio basic statistics) John and Mary are considering investing in a combination of ABC stock and XYZ stock. The return on ABC is determined by a coin flip: If the coin is heads,
14. (Efficient frontier) This question relates to the data in the previous question.Calculate and graph the efficient frontier of the stock portfolios composed of stocks X and Y.
b. What should be the return statistics of the second stock you’ll combine in this portfolio, assuming this stock has covariance of 0.01 with Merlyn?
a. What should be the return statistics of the second stock you’ll combine in this portfolio, assuming this stock has zero correlation with Merlyn?
12. (Stock characteristics to match portfolio target return, challenging) Your client asks you to create a two- stock portfolio having an expected return of 15%and standard deviation of 25%. The
c. Compute the minimum variance portfolio.
b. Compute the returns of all portfolios that are combinations of ABC and XYZ with the proportion of ABC being 0%, 10%, . . . , 90%, 100%. Graph these returns.
a. Compute the expected return and standard deviation of a portfolio composed of 25% ABC and 75% XYZ.
b. What are the return and the standard deviation of an equally weighted portfolio of stocks A and B?
a. What are the return and the standard deviation of a portfolio composed of 30% of stock A and 70% of stock B?
b. Calculate the minimum variance portfolio for the portfolio composed of the two assets described above.
a. Suggest a portfolio combination that improves return while maintaining the same level of risk.
d. What can you conclude about the connection between the variance of the return from the coin flips and the correlation between the flips?
c. If the first coin flip is heads, then the second coin flip will be heads with a probability of 0.8. If the first coin flip is tails, then the second coin flip will be tails with a probability of
b. If the first coin flip is heads, then the second coin flip will be tails, and vice versa (correlation of – 1).
a. If the first coin flip is heads, then the second coin flip will be heads as well, and vice versa (correlation of +1).
4. (Basic two-stock statistics with non-zero correlation) The previous question assumes that the correlation between the coin flips is zero. Repeat this question with the following correlations:
3. (Basic two-stock statistics) You have $500 to invest. You decide to split it into two parts. The return on each $250 will be determined by a coin toss, and the results of the two tosses are not
2. (Basic stock statistics) You invest $500 in a stock for which the return is determined by a coin flip. If the coin comes up heads, the stock returns 10%, and if it comes up tails, the investment
c. Comment on the following statement: “Ford has lower returns and higher standard deviation of returns than PPG. Therefore, any rational investor would invest in PPG only and would leave Ford out
b. If you invested in a portfolio composed of 50% Ford and 50% PPG, what would be the expected portfolio return and standard deviation?
a. Calculate the following statistics for these two shares: average return, variance of returns, standard deviation of returns, covariance of returns, and correlation coefficient.
When the two coins have a correlation between – 1 and +1, some of the risk can be eliminated through diversification. Again, this is true for stock portfolios.
When the two coins have a perfect positive correlation of +1, it’s impossible to diversify away any risk. You will see that a similar conclusion holds for stock portfolios.
When the two coins have a perfect negative correlation of – 1, we can create a risk- free asset using combinations of the two assets. In this section, you’ll see that a similar conclusion is true
Mean- variance calculations for three- asset portfolios
Efficient section of portfolio allocation line.
The portfolio allocation line.
Minimum variance portfolio
Risk diversification
Portfolio risk and return
Mean and standard deviation of two-asset portfolios
How do you maximize your return without losing money?
What is the best investment portfolio?
Etc…
Portfolio of transportation stocks.
Portfolio of low- beta stocks.
Portfolio of “green” (environmental- friendly) stocks.
4. Make up your own portfolio! Repeat exercise 2, but substitute a 10- asset portfolio of your own creation. Here are some suggestions:
3. In the template for this exercises, you will find the data for 10 packaged food stocks. Run the template data, and find the portfolio statistics. Notice that while the portfolio R2 is higher than
2. The template for this exercise gives price information and market cap for 10 companies. Compute the stock returns and the individual regressions of returns on the S&P 500. Use this data to
c. The template for this question shows the market cap of each of the stocks. Use these data to construct a value- weighted portfolio. Show that the R2 of the regression of this portfolio’s returns
b. For an equally weighted portfolio of the four oil stocks, compute the regression on the S&P 500. Show that the R2 of the regression is greater than the weighted average R2 of the individual stocks.
a. Compute the stock returns and the individual regressions of returns on the S&P 500.
1. The template for this exercise gives price information for four oil companies.
We then regress the portfolio returns on the SP 500 and compare this regression to the individual regressions from the previous bullet.
Using the functions Intercept, Slope, and Rsq, we compute the regressions on the SP 500 for each of the four stocks BA, K, F, and HPQ. This is basically a repeat of the exercise in the previous
b. Regress Mabelberry Fruit stock returns on those Sawyer’s Jam. Can you explain the R2?
a. Given the Mabelberry Fruit stock returns below, compute the Sawyer’s Jam returns.
23. (Regression analysis) Mabelberry Fruit and Sawyer’s Jam are two competing companies. An MBA student has done a calculation and found that the return on Sawyer’s Jam stock is completely
d. Do you find the evidence in the table convincing? (Discuss briefly the R2 of the regression.)
c. The monetary authorities in your country are considering increasing the money growth rate by 1% from its current level. Predict by how much this will increase the long- term bond interest rate.
b. If a country has zero money growth, what is its predicted long- term bond interest rate?
a. Plot the data, and use a regression to find the relation between the money growth and the long- term bond interest rate.
22. (Regression analysis) Economists have long believed that the greater the amount of money printed, the higher the long- term interest rates. Evidence for this view can be found in the table below,
20. (Correlation coefficient calculation) You believe that there is a 15% chance that stock A will decline by 10% and an 85% chance that it will increase by 15%. Correspondingly, there is a 30%
b. You plan to invest 50% of your money in the portfolio constructed in part a of this question and 50% in a risk- free asset. The risk- free interest rate is 5%. What is the expected return on this
a. What is the standard deviation of a portfolio invested 25% in stock A, 25% in stock B, and 50% in stock C?
c. Calculate the expected return and the variance of a mixed portfolio comprised of 75% of security A and 25% of security B.
b. Calculate the probability distribution of the returns on a mixed portfolio comprised of equal proportions of securities A and B. Also calculate the expected return, variance, and standard
a. Calculate each security’s expected return, variance, and standard deviation.
18. (Expected return and probability distribution) Assume that an individual can either invest all of her resources in one of two securities A or B; alternatively, she can diversify her investment
17. (Portfolio with negative perfect correlation) Suppose that the annual returns on two stocks (A and B) are perfectly negatively correlated and that rA = 0.02, rB = 0.06, σA = 0.1, and σB = 0.15.
c. The standard deviation of returns on a portfolio is equal to the weighted average of the standard deviations on the individual securities if these returns are completely uncorrelated.
b. The expected return on a portfolio is a weighted average of the expected returns on the individual securities.
a. Diversification reduces risk because prices of stocks do not usually move exactly together.
16. (General) Explain why each of the following statements is correct or incorrect:
15. (Regression of a stock against the market) By using information provided in the previous problem, perform a regression of the portfolio returns vs. S&P 500 index returns for the period of 24
b. On average, would you be better off by investing in this portfolio or by investing in S&P 500 index during this period of 2 years?
14. (Downloading data and descriptive statistics of stocks) Go to http:// finance.yahoo.com. Download monthly stock price data for Oracle Corporation(ORCL), Microsoft Corporation (MSFT), and IBM
c. Which is the better investment of the two. Give a brief explanation.
b. Mature’s yearly returns.
a. Young’s yearly returns.
c. Are there any advantages to diversifying between IBM and Kellogg?Calculate:
b. Compute the covariance and correlation coefficient between the returns of Kellogg and IBM.
a. Compute the annual return of each stock.
c. Are there any advantages to diversifying between IBM and Kellogg?
b. Compute the covariance and correlation coefficient between the returns of Kellogg and IBM.
. Compute the annual return of each stock.
c. Calculate the annual mean and standard deviation for the dividend and split- adjusted returns.
b. Calculate the weekly mean and standard deviation for the dividend and split- adjusted returns.
a. Calculate the dividend and split- adjusted returns for each of the weeks.
6. (Adjusting prices to dividends and splits) Below you will find weekly stock price, dividend, and split data for Visa:
c. If you bought Kellogg stock and had no intention of ever selling it, why might you be interested in the stock’s dividend yield?
b. Stock analysts like to talk about the dividend yield— the dividend divided into the stock price. Compute the annual dividend yield for Kellogg, defined as Dividends over the year Average stock
a. Calculate the dividend- adjusted returns for each of the years, their mean, and their standard deviation.
d. Is the mutual impact of the two company’s returns (one on the other)large or small? Explain.
c. The r- squared of the regression.
b. The value of the intercept.
a. The slope of the regression.
4. (Regression of two stocks) Use the returns of Ford and GM corporations in the previous question. Regress Ford’s returns on those of GM. Report:
b. Calculate the covariance between returns of Ford and GM.
a. Calculate the monthly returns for each firm.
e. If the historical information correctly predicts future returns (is this reasonable?), which fund would you choose?
c. Graph the fund returns and the dates.
b. Compute the mean, variance, and standard deviation of the fund returns.

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